good afternoon welcome to capital account i'm lauren lyster here in washington d.c. these are your headlines for friday nov thirtieth two thousand and twelve the fiscal cliff continues to drive the news cycle and washington politics meanwhile the wall street journal reports it's pushing us i.p.o.'s stock sales and mergers as sellers feared taxes on investment gains could go up next year now despite news like this and even as by efforts to promote i.p.o. bubbles the number of companies going public continues to be down significantly from highs in the one nine hundred ninety s. who why would we want this.

why would we ever want to bubble party private equity advisor william janeway is here to explain why bubbles are sometimes good plus u.s. corporate profits hit a record high in the third quarter according to the bureau of economic analysis with these profits why are we seeing more business investment to fuel innovation will discuss and we hear about sovereign credit downgrade and warnings of those downgrades all the time in the wake of the debt crisis and austerity in europe but now extravagance and luxury are on the line the ratings agency moody's has reportedly put carmaker aston martin on review for a debt downgrade we'll discuss let's get to today's capital account.

bubbles are often thought of mental to an economy as health needless to say but what if in reality of progress cannot happen without bubbles and with the u.s. economy still muddling along since the two thousand and eight crisis with the low level of i.p.o. volume since the dot com bubble burst low business investment low were record budget deficits from the government and high unemployment do we actually need a bubble not a case i would make but a very smart gentlemen is here to tell us why they can sometimes be good joining me from our new york studio is dr william janeway he's senior advisor for warburg pincus technology and author of the book doing capitalism in the innovation economy markets speculation and this dave thank you so much for being on the show. very good to be here we're going to have you because you have said and i would definitely agree the bubbles have received bad press whether we're talking about the two live bubble in the sixteen hundreds or whether we're talking about the real

estate bubble ahead of two thousand and eight but in some instances you say bubbles can be good why can bubbles be good and what kind of a bubble would we need or might we need now. well the first thing as you've said is that bubbles are boringly common where ever there is a active trading liquid market in an asset from tulip bulbs to real estate by way of gold and silver mines in the dead of new countries there will be speculative excess bull runs and collapses they are boring but every once in a while the object of speculation over some two hundred fifty years has been one of those transformational technologies that change everything that actually once capital is deployed at large scale create a new economy from the canal mania of the seventeen eighties through the success of

railroad booms of the nineteenth century and on to the great electrification bubble of the one nine hundred twenty s. and of course our own beloved dot com telecom bubble of the late nineteenth nine days which gave us the infrastructure of the internet and the digital economy which we are living learning now to explore and enjoy these were not have happen the physical assets would not have been deployed how to not been for speculative financial mania and why is that because these new technologies and the massive investment and networks necessarily necessary to make them accessible and available cannot be valued upfront we cannot know what the net present value as the financial economists would have us believe

of the future cash flows of these new technologies these new networks will be until they're actually built we live in a world of uncertainty where. the hoped for rational expectations of the mainstream neo classical economists are simply unavailable and therefore irrelevant so then you're given some examples of historically some major transitions in enervation that wouldn't have occurred without bubbles but would that have you encouraging certain kinds of bubbles are saying that those are necessary looking forward or is this just something that you know yes this was history but it's not something that you should encourage you used a magic pair of words certain kinds of bubbles think of it as a kind of two dimensional matrix if you watch me you can imagine that along one

access you have the the locus of speculation is it is that limited to the stock market or does a proceed to infect the credit system the banking system as the real estate bubble of the mid two thousand did and second what's the object of speculation is a technology that increases productivity or is a beach houses in the nevada desert which will contribute nothing to greater productivity and greater living standards if the bubble is limited to the stock market if it is focus on technology in hand saying productivity enhancing new technologies then not only can we live with it but we will benefit from it that of course is exactly what occurred in the late one nine hundred ninety s. when as john doerr of kleiner perkins love to say we created six trillion dollars of wealth the greatest legal creation of wealth in the history of capitalism but

when that six trillion dollars disappeared in two thousand and one until we had a very mild recession that was well within historic norms nothing. like the global financial crisis that occurred in two thousand and eight two thousand and nine when then looking at opportunities for a speculative investment in formation of bubbles in the stock market the likelihood of that i would imagine would be less and less given the lower volume in us i.p.o.'s and we can bring about that looks like for our viewers just so that they can see how the volume of i.p.o.'s the number of i.p.o.'s has really declined from the ninety's where we saw so many and in the decade plus since then they've just really been at low levels first i what is your view i know there's a conventional wisdom but what's your view on why the number of i.p.o.'s is so much lower than it was prior to the ensemble cast there are there are a number of reasons and first of all i do agree with you you can't just wave

a magic wand and invoke a new bubble if you could my colleagues out in silicon valley would have succeeded in promoting a nano tech bubble in the first half of the two thousands and a clean tech bubble in the last five years in fact in the environment of the leveraging which has been going on since two thousand and eight and will continue it involved in an environment where people are paying down debt saving more then expectations will be muted bubbles are not to be expected there are additional institutional reasons why the i.p.o. market has become much less accessible back in ninety nine two thousand the ecosystem that had grown up around the venture capital industry from the one nine hundred seventy s. on came apart the on the one hand the specialist investment banking firms of the day alex brown hambrecht and quist all declared victory and sold themselves pick

prices to the big banks and the consolidation of the investment banking industry means that to attract the attention of one of the. remaining mega global banks you have to do a deal of enormous size to make it worthwhile getting their attention so that that is one of the major institutional reasons why it is hard to see a the kind of routine common access to the i.p.o. market that we enjoyed in nineteen the one nine hundred eighty s. in the one nine hundred ninety s. returning well what about something like the jobs act which i've talked to so many people that say the jobs act just opens the door to so much fraud but on its face what it was supposed to do was it was supposed to roll back some sarbanes oxley regulations some disclosure requirements to allow smaller companies to have an easier time going public does something like that help the child talking about you

mark me as one of the skeptics along with some of those people you've been talking to first of all the the the incremental cost of complying with financial regulations and making financial statements vailable is is measurable but it's not killing exempting what are called emerging companies with revenues up to a billion dollars from the requirements for financial disclosure i think was of was it was a major mistake and i don't think it will in any way reconstruct the institutional environment that enabled emerging companies at the scale of less well under one hundred million to gain access to the public market such as we enjoyed from roughly nine hundred eighty two right up to two the dot com bubble of the late ninety's and just a brilliant briefly follow up if we look at the one nine hundred ninety s. i.p.o. market as a sort of bubble fueled by market euphoria and credit to are those level of

i.p.o.'s sustainable is this even something we need to return to well first of all there really was it wasn't a credit bubble there was there was a joke. bond market for the new telecom companies but it certainly did not involve the banking system that's that's the first thing second prior to nine hundred ninety eight the valuations were not excessive for new companies they were well within historic norms it was in one thousand nine hundred ninety eight the bubble took off if you take ninety ninety eight through two thousand out of the numbers and just go back to the midnight the ninety's you're operating in a in a world of reasonable valuations where investors did well buying into new companies and then what is the role of a v.c. is now because you touched on him briefly and you mention there consultation and your from this world you've worked on and this area for years why are the dollars

falling why are the consolidation is happening what impact does it have on innovation right now well you can do a causal chain that the dollars going into venture capital are declining and i want to come back to the quantities involved the dollars are declining because the venture capital returns have declined the venture capital returns have declined because there is such limited access to the i.p.o. market one follows on the other but it's important to remember that there was no bubble greater in the late one nine hundred ninety s. than the increase in the flow of money from pension funds into members of the national venture capital association from a range of roughly five to eight billion dollars of then current dollars through the mid ninety's to two thousand the money rose to one hundred and five billion dollars in two thousand that's one hundred forty billion dollars in current dollars

in other words the state pension funds caught up with the superior returns of venture capital through the nineteen eighties and nineties just in time. to put a vast amount of capital to work at the all time peak of the bubble the nasdaq was at five thousand when they were pouring capital and it hasn't come within forty percent of the levels since that of course as the money that was put to work that extraordinary increase in capital was put to work it earned very very poor returns. the the pension funds that provided that capital are providing much much less there are fewer and fewer venture firms the amount of money going in is now about fifteen billion versus the hundred and forty billion and what was seen to be a permanent new industry

a separate clip is beginning to be recognized as a practice a craft practice whose whose best practitioners do produce remarkable returns but it is not generalizable is interesting you know i want to go to break and when we come back we'll talk more about with that transition what can feel and evasion what else we need to turn to we'll have more of dr william janeway in a moment also still ahead in extravagance and luxury can't escape a movie downgrade possibly we'll tell you why james bond's favorite ride could be in trouble and tonight's loose change but first your closing market numbers.

welcome back we're talking about innovation and how you fuel it and if bubbles can be helpful and before the break we were talking about how i.p.o.'s have declined in the reasons for that and we were talking about the decline in dollars raised by v.c. firms venture capital and we can bring up a chart i just do want to show our viewers what that looks like so they can kind of see how those numbers have have changed over the years relative to what kind of the median is so there you see that and we were talking to our gas because he is from this world he's talking about some major changes so with these trends where do you turn for the kind of money and investment that's needed to fuel innovation now one may argue we wouldn't necessarily on this show but some guests have in the past

that we need government investment and here's one of our past gas richard duncan talking about government investment and the need for it but distinguishing a great deal between the types of investment investment needed and not take a listen. they are going to spend the money there's only a matter of are they going to waste it on too much consumption or as they've been doing over the last ten years or are they going to invest if they invest in aggressively and transformative twenty first century technologies like solar nanotechnology genetic engineering biotechnology they can establish an absolutely understandable lead in these twenty first century technologies. and he says this is what may be needed for economic progress so is government investment a necessary part of fueling innovation and at least some of these industries and how does this work efficiently given the malinvestment and misallocation of capital that can come with government spending let's ask our guest what he thinks william

janeway so dr jane way i do want to ask and i've heard you discussed this you know is there a role for government investment in something like clean energy which you referred to you said there wasn't a bubble possible and clean energy and there wasn't one possible and nanotech so is there any role of government spending absolutely yes the entire digital economy was based on the massive commitment of capital of for funding research and for procurement by the defense department in the nineteen fifties and sixties it was indeed some of it was wasted but here's the point the entire innovation economy always has been and always will be driven by process of trial and error and error and error at that level of scientific discovery and technical invention and then downstream and learning how the new technologies can be put to work for commercial profit when you look at the history of the venture capital industry what

stands out is that eighty percent of all venture capital dollars and more than one hundred percent of all venture capital profits have been made in just two sectors i.t. information and communications technology and biomedicine why is that it's because the federal government built a platform for venture capitalists and the entrepreneurs they back to dance that kind of investment and the role of government as a creative and collaborative customer has not been a veil. the new twenty first century technologies as discussed the clean green target of energy technologies venture capitalists have been way ahead of the curve it's as if they'd been investing trying to invest in personal computers in the nineteen sixty's before the microprocessor had been broadly and

hansen developed and radically reduced in cost ok so that's really interesting it's actually something to think about before we go i do want the opportunity to ask you because you have had your career in this area because we have this debate on the fiscal cliff because we have this debate on changes to the tax code carried interest is something that's been discussed why shouldn't carried interest be taxed in line with regular income if this is how you're making your living why indeed. so you're saying it should be taxed as regular income i have to agree with those who say that logically acquitted it should be all right there you go from someone of the industry i appreciate you being on the show really interesting insights dr william janeway thank you.

ari let's wrap up with loose change and viewer feedback all rolled into one dmitri i've got you here and i don't know if you're a james bond fan and i'm not necessarily but i'm sure we all know from james bond the aston martin. there is a safe place where we are free to challenge. the laws of physics and draw. of. hamas. so i think they're usually getting blown up in james bond movies from what i hear but now maybe they're going to get blown up by what moody's is saying ok the ratings agency has reportedly put aston martin on review for a debt downgrade and what i think is interesting about this dimitri is that we always

talk about downgrades with austerity in europe and sovereign debt crises and we see these countries facing downgrades but look luxuries impactive to extravagances feeling the pinch as well so what's the reason for the. i forget there's that i don't know it's a credit yeah there's a great is yes they might see their debt downgrade i mean i don't know are the services i mean you like the story you were a big figure maybe you're in the market for and are smart to you you know you're you make a lot more than i do here at this i work on your ridiculous maybe so maybe this is why you want to you tell me what was it about i already did i just set it up but the whole beginning of this this intro what i mean. and i don't hear that aston martins from the car buffs around this office that they're not very good cars according to the. car so martin is a very good car i've heard aston martin is not well whoever told you that of the group ok fine well let her ride is going nowhere because this is way more

interesting so we talk about algos all the time and there was this insane stock move yesterday and whiting petroleum so zero had to take it was they said this was a fat finger as one explanation of why the stock gained and lost like eight percent in just a couple of seconds so take a look at this so here's the stock price so you can see it just like shot up and down and this is all in a period of like three seconds and it went all the way down over here in like twenty seconds. so that ok well this is from our friends and it's just this screen ok well the reason why they're saying it was this figure was that the algos misread a wall street journal story. that came out so what it said was that. whiting petroleum explorer is selling itself which was bullish you know buy buy buy and that that's why it shot up and that then they decided not to after buyers baulked

because of their asking price and then sell sell sell so we don't know exactly why the stock price did that in a period of three seconds but it's an interesting theory and we do at least know that when everybody starts to sell the algos dollar program they don't i don't know it's crazy because i'm in three seconds that is remarkable i don't know why small officials are. who i had to clear it was or whatever ok do you have anything. to do with it was a discussion. oh dimitri let's move on maybe you need some helium but guess what there's a shortage of furniture and ok it has people asking where is the helium take a look. texas is the largest producer of helium so how is it that we can't get helium here for our balloons blaming the shortage and rising prices on the downturn in natural gas production. so just quickly and i'm sure that'll be fine because you don't have any things that day oh you do ok well there is

a shortage it's not just in the u.s. it's in places like tokyo and algeria they're being forced to literally deflate their balloons reportedly inflatable mickey mouse heads at disneyland in tokyo are being sold well maybe this will stop all the kids here in america birthday parties suck on helium and get i'm really and it's not just make your voice i mean i actually wanted to try and find a helium balloon for this episode so i guess i'm not very much more sophisticated than those kids you're talking to used to do that did of course as well but what's so fun about it i don't know you sound funny. that's. known to me let's move on ok. there are. this is fun because we have dimitri to add his wisdom to intervene peter schiff this week about his hyper inflation predictions which he's been calling for since at least two thousand and eight and dominic's kaleri tweeted me to say sorry capital account i listen to shift almost every morning and he's always said hyperinflation is

a worst case scenario so to make sure what you think about that i mean that is true but i guess the question is how long can you kind of qualify such a bold prediction well where you get need to be called out on it i mean i don't know exactly that specific thing but i think where i think peter shifts and i can sympathize with me and i made this mistake as well in two thousand and eight i give too much credit to the increase in base funding. not enough to the effect of the banking system and bank lending and additional forms of affectively what is money so i thought that we would get inflation a lot sooner or with greater. expansions another was so i think there is room there for her future and i think we're all right when we don't criticize which that's a question well that's i mean ok well and someone else on facebook so laila ali pointed out there. definition of hyperinflation neither is there a precise definition of the effect of an alien invasion stimulating the economy

which is a reference to the following. if we discovered that space aliens were planning to attack and we needed a a massive buildup to counter the space alien threat and really inflation and budget deficit took secondary place to that. this slump would be over in eighteen months and then if we discovered. and there is a polar opposite viewpoint by a gentleman who actually did link to our interview with peter but let me just let me just say that where paul paul krugman is completely wrong doesn't get it is that he focused entirely on demand there's only thinks about so that's why he says space alien invasion that would cause everyone to start demanding x.y.z. and always he doesn't get that there is value creation and you have to actually create goods with value as people like mike norman also gets it wrong he thinks print money deficit spending that gives people jobs what that work how jobs you have and where you're creating well thank you for getting fired up in the last couple that i fired up there and i'm not going like helium or ideally my dream my got to go up against

a cloud or and that is all we have time for thank you so much for watching be sure to come back on monday in the meantime you can follow me on twitter you can like our facebook page watch us on you tube or hulu and have yourself a great night. with . technology innovation all the lives developments around russia we've got the future covered.

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